How do you determine the maximum price you would pay?

kreezo

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Hi all,

I always hear people talk about "this is the maximum price I would pay" or "put in an amount of $$$ and see what the seller says...". How do people come out with that ceiling price on what to pay?

Thanks!

Chris
 

Nir

New Forum Member
REIN Member
Good question:
Pls do it backwards:
decide on the minimum net income you want per door per month. say $200/door/mo.
Then calculate the maximum purchase price that would generate that income for you.

Example: 4-plex target net income = 200/door/mo x 4 = 800/mo. total rent = 4000. estimated expenses (before financing) = 2000/mo.
--->
mortgage should not be higher than $1200/mo to generate that net income of 800/mo for you.
now calculate the maximum purchase price based on that monthly mort payment. (about 400K with 10% down, 30 yrs, 2.5% variable)
Life simplified?
glad if helped.
GL!
N.
PS. as usual in life, this model can be complicated by adding factors such as expected appreciation/potential rent increase etc. etc.
 

invst4profit

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Above is clear, concise and works perfect to determine maximum price you should pay.

Unlike buying a personal home the value of any investment income property is based on the rental income. Also keep in mind only pay based on present income not future. The opportunity to increase rent or reno and add more units has no bearing on what the place is worth.

The maximum you pay depends on the rental income. The only other variable to add on, which reduces your offer, is whether repairs are immediately required.
 

Thomas Beyer

Senior Forum Member
REIN Member
QUOTE (invst4profit @ Feb 11 2010, 05:17 PM) ..
Unlike buying a personal home the value of any investment income property is based on the rental income.
true for a rental property .. not true for an abode that could be owner occupied, such as a single family home, townhouse or condo
QUOTE (invst4profit @ Feb 11 2010, 05:17 PM) .. Also keep in mind only pay based on present income not future.
not true. You always have to keep in mind future possibilities. Thus, on a house or unit with 50% rental upside you`re willing to pay more than one with no or low upside !

QUOTE (invst4profit @ Feb 11 2010, 05:17 PM) ..The opportunity to increase rent or reno and add more units has no bearing on what the place is worth.
sure it does !

Some markets we own assets in do not bear more than X / month in rent .. so I`d pay less for that city than one where upgrades could yield a $200 or $400/month rental increase !
 

Mecheng

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The price of single family homes is usually determined by market value (that which an owner occupant is willing to pay at a given time).
But if purchasing this type of property as an investment you should still base your "ceiling price on what to pay", off of the rental income. Primarily achieving a positive cash flow.
If your down payment is big enough to get positive cash flow at market value, than that`s your ceiling price. If however, you need to be X% below market value to get positive cash flow then that would be your ceiling price. (If that offer is accepted or not is a different story)

You should also consider your expected ROI, which will determine if you should even be making an offer at that price. But that`s a whole other topic of discussion.
 

invst4profit

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QUOTE (Mecheng @ Feb 12 2010, 12:19 PM) If your down payment is big enough to get positive cash flow at market value, than that`s your ceiling price.

Cash invested in a property does not create positive cash flow, all it creates is a return on the cash invested. There are better ways to create a return on cash investments than the going mortgage rates which is all you achieve with a down payment.


Thomas unlike you I never reward a seller for future return that they were too lazy to create themselves.
I have had sellers tell me there was potential increased income in a property or other positive upsides which is why they set there asking price where they have.
I always tell them to come back and see me when they increase the income to a level to justify there price.

A property is only worth what it is worth today, I have never paid a premium for future income.
 

RCrein

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QUOTE (invst4profit @ Feb 12 2010, 07:39 PM) Cash invested in a property does not create positive cash flow, all it creates is a return on the cash invested. There are better ways to create a return on cash investments than the going mortgage rates which is all you achieve with a down payment.
Thank you Greg. IMO this is an an absolute gem! I have never heard this expressed exactly this way and appreciate the insight. Gave me one of those aha moments that has changed the way I look at leverage. Now I think I understand why you stated in another post that you always use 100 percent financing when you analyze a property.
 

invst4profit

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It is a reality that many investors seem to overlook when calculating cash flow. Every property has two income streams one must be attributed to cash invested the other to the property itself. I always chuckle to myself when a investor talks about positive cash flow without ever including in the discussion how much money is invested in the property. They are clearly deluding themselves. In addition as a property appreciates you must attribute a income value to the appreciation as well otherwise the cash should be accessed and invested elsewhere to earn a better return.
I do not advocate 100% financing on investments unless the individual has accounted for interest rises and has sufficient cash reserves (invested of course).
The best 100% financing scheme is to use a HELOC for the down payment portion and as cash reserves. I consider a personal home a liability as it earns no income whereby putting the money within it into a investment takes dormant money and puts it to work.

Cash always needs to earn it`s keep.
 

housingrental

Frequent Forum Member
Registered
I don`t agree with Greg`s post in its entirety

Future expectations and what value add can be possible should influence the price your willing to purchase the property at.

For residential properties past comparable sales can be a guiding point but with markets with scarcity in supply if you want to live on a particular street, with that particular ravine view, you might be willing to pay a premium over what the property might sell for if a few were listed and had to be sold next month.

For an investment property market cap rate or other valuation metrics (current rent to purchase price, potential rent to purchase price, replacement value to asking price, etc.) should help guide you. And just like the residential property example your top end might be above market price for a property. Land assembly? Having a relative live in one unit? No other investment properties in that particular neighborhood you want of that type (ie price range, suite mix, etc.)
 

Nir

New Forum Member
REIN Member
QUOTE (invst4profit @ Feb 12 2010, 05:39 PM) I never reward a seller for future return that they were too lazy to create themselves.

Thomas is right. Greg, unfortunately what you are really saying is: I will lose a great deal because seller is lazy!
why punish yourself due to his laziness? don`t you prefer buying the property and making tons of money?
Example (on purpose I will provide an extreme example which is sometimes the best way to explain things):

Seller asking 100K for a 4-plex with total rent of $500.
you know all other 4-plexes in the neighborhood are sold for 400K, generating rent of $4000
you also know the owner was lazy, owned for 50 years and never increased rents.

Cheers.
 

invst4profit

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Registered
QUOTE (investsmart @ Feb 13 2010, 03:31 PM) Thomas is right. Greg, unfortunately what you are really saying is: I will lose a great deal because seller is lazy!why punish yourself due to his laziness? don`t you prefer buying the property and making tons of money?
Example (on purpose I will provide an extreme example which is sometimes the best way to explain things):

Seller asking 100K for a 4-plex with total rent of $500.
you know all other 4-plexes in the neighborhood are sold for 400K, generating rent of $4000
you also know the owner was lazy, owned for 50 years and never increased rents.

Cheers.

I fully agree with your example. What I avoid is a seller that attempts to push there sale price much beyond your extreme example. IN your example $100,000 is definitely a good price where as $200,000 is obviously lunacy.
For me, because of the ridiculous RTA restrictions, it is very risky to simply assume a upside can be easily achieved which tends to put me off of deals that are marginal based on the potential upside.
A great deal is a great deal but a deal that prices a property much beyond the value of it`s present income is not something, in Ontario, I would be interested in generally speaking. In addition I place no value, in regards to purchase price, on future appreciation. My emphases is on buying below market to built immediate equity. Appreciation is simply gravy.
Otherwise I pass because I believe there is always another deal around the corner.

It is very important in Ontario, where for example tenants have the right to move back into there previously occupied unit for virtually the same rent following a extensive renovation, that investors look beyond the price.

I admit
I would consider paying a slight premium to a lazy LL but not without serious reservations and to this point in time have not found a good enough deal to do so.
 
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